9706 · 3.2.3
Auditing and Stewardship of Limited Companies flashcards
Revision flashcards for Cambridge 9706 Auditing and Stewardship of Limited Companies (syllabus 3.2.3). Flip, recall, then mark a real past-paper question.
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What is stewardship in the context of a limited company?
Stewardship is the responsibility of the company's directors to manage the business and its assets on behalf of the shareholders (the owners), and to report back to them on their performance.
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What is the primary role of an external auditor?
To provide an independent opinion to the shareholders on whether the company's financial statements give a 'true and fair view' and have been prepared in accordance with relevant accounting standards and legal requirements.
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What is a 'true and fair view'?
A principle that financial statements must be free from material misstatements and faithfully represent the company's financial position and performance. 'True' means factually correct and 'fair' means presented in an impartial and unbiased way.
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What is the difference between an unqualified and a qualified audit report?
An unqualified (or 'clean') report means the auditor believes the financial statements are true and fair. A qualified report means the auditor has found material misstatements or could not obtain sufficient evidence, and the financial statements are not entirely true and fair.
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What is the main difference between an internal and an external audit?
An external audit is an independent review of financial statements for shareholders. An internal audit is an internal function that reviews the company's operations and controls for management. External auditors are independent; internal auditors are employees.
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What are the directors' primary responsibilities regarding financial reporting?
Directors are responsible for preparing financial statements that give a true and fair view, maintaining adequate accounting records, and implementing a system of internal controls to safeguard assets and prevent fraud.
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What is 'materiality' in the context of an audit?
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Auditors focus on detecting material misstatements.
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What is the purpose of an audit committee?
An audit committee, a subcommittee of the Board of Directors, oversees the financial reporting process, liaises with external auditors to ensure their independence, and reviews the effectiveness of the company's internal controls.
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External audit
An independent review of the financial statements for the shareholders, carried out by an outside firm. It reports to the shareholders and is a statutory requirement for most limited companies.
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Internal audit
A function inside the company that reviews its controls, risk management and governance for management. It reports to senior management or the audit committee and is not always a statutory requirement.
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Unqualified audit report
Issued when the auditor concludes that the financial statements give a true and fair view in all material respects. Also called a clean report.
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Qualified audit report
Issued when the auditor concludes that, except for the effects of a specific matter, the financial statements give a true and fair view.
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Audit committee
A subcommittee of the Board of Directors that oversees the financial reporting process, liaises with the external auditors to ensure their independence, and reviews the effectiveness of the company's internal controls.